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IBM won't exit chips

CFO says $3 billion spending plan shows commitment to sector

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Stock analysts who cover IBM got to ask company executives about the expected sale of its microchip manufacturing business on Thursday during IBM's quarterly earnings review.

IBM chief financial officer Martin Schroeter said the company's recent announcement that it would spend $3 billion over the next five years on dreaming up the next generation of microprocessors shows IBM doesn't plan a wholesale exit of the business, which defines so much of its Hudson Valley operations.

"We're the leader today, and we would expect with this kind of investment we can continue to maintain that leadership," Schroeter said during the conference call, which did not include CEO Ginni Rometty.

For months now there have been news reports published — without denials from IBM — that the company was negotiating the sale of its microchip manufacturing business to GlobalFoundries for as much as $2 billion, although earlier this week it appeared that the deal may be at a standstill.

GlobalFoundries is a natural candidate to acquire IBM chip-making capabilities since its Fab 8 factory in Saratoga County sits in the middle of IBM's three chip factories in East Fishkill, Burlington, Vt., and Montreal.

Ben Reitzes, an analyst with Barclays Capital, asked Schroeter how IBM can "reconcile" the idea spending $3 billion on chip research when the company is reportedly selling off its chip production capabilities.

His answer seems to indicate that IBM may be moving toward a "fabless" model for its chip business, which would make sense since GlobalFoundries is a computer chip "foundry" that makes chips for other companies that don't have their own manufacturing capabilities. Although IBM made chips for its own hardware, it also operated as a foundry. However, margins in the foundry business are extremely thin, much thinner than the margins that IBM needs as it seeks to boost earnings to $20 per share by next year.

In order to do that, IBM has been focusing on software and services instead of manufacturing. Another focus has been on cognitive computing that could be transformed through a new generation of chips that act more like the human brain than today's chips that have changed little in terms of chemistry and materials in decades.

"We're also thinking about, as we indicated, what the post-silicon world looks like," Schroeter said. "So we remain committed to being the leader of high performance and high-end systems. And we have not changed our view on that at all. We've been very vocal about it and we'll stay on that path."